Institutions tell pollsters “more fees”, “more consultants” and “more funds of funds”

27 July 2008

When Man Investments recently wrote that “FoHF [Funds of hedge funds] have been and will continue to be an integral part of hedge fund investing” (see related posting), they weren’t kidding.  A survey released by IPE and Invesco this week seems to indicate that funds of hedge funds now have a market penetration of 100% among European institutions.  In other words, every survey respondent that invests in hedge funds uses funds of funds for at least part of their portfolio (see chart below from their report). 

Not surprisingly, the survey finds that equity-based hedge fund strategies fell out of favour, big time, amongst the European institutions canvassed.  But with many respondents using a mixture of funds of funds and single strategies, it’s difficult to determine if investors actually moved money from one to the others.  Suffice to say, funds of funds may not be falling out of favour after all (as some have suggested - see related posting).

Performance Fees: Institutions want more

Performance fees are of thought of as being synonymous with hedge funds.  And in fact, from a US regulatory perspective, this may actually have a nugget of truth (see related posting).  But it turns out that institutional investors - at least the ones in Europe - want performance fees on all types of strategies.  And they’re not getting them.  As the chart below shows, there is a major gap between the percentage of investors who “currently” pay some kind of performance fee and the percentage that would “ideally” like to pay a performance fee.

Interestingly, the report says that this gap has actually shrunk for cash, fixed income and balanced asset classes.  Apparently, investor appetite for performance fees in those asset classes wilted over the past year.  The report suggests this could be a sampling issue, but we wonder if investors may have also determined that a performance fee for a relative-return fund is less compelling than it is for an absolute return strategy.

Consultants: Institutions using more of them too

In a recent report, Watson Wyatt showed that consultants are virtually being squeezed out of the “pension fund food chain” (see related posting).  But this report seems to suggest otherwise.  According to the survey, usage of investment consultants experienced a huge pop in 2007, from a third of all investors to well over half.  

“Why the fluctuation?”, you say?  (or “WTF?” for short)  Again, the report says the inclusion of more consultant-loving UK investors in 2007 may have affected the results.  (Still, the report says “…there seems to have been a significant uptake in France, Germany and Italy.”)  But the survey also reports a significant increase in the percentage of institutions looking to consultants for help selecting managers and for “investment advice”.  We hypothesize that the move to alternative investments may also play a role here.

The rest of the report makes for an interesting read if you’re an asset manager targeting this segment of investors.  There’s a ton of data on what excites institutional investors, how they are selected and why they get canned.

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